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MLL331 CORPORATE LAW LECTURE NOTESCases LegislationTopic 1 – What is a Company? Corporate Law Regulatory Framework,Registration and its EffectsWhat is a Company?A company is an artificial entity recognised by the law as a legal person with rights and liabilities Distinct from its shareholders, direc...

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MLL331 CORPORATE LAW LECTURE NOTES Cases Legislation

Topic 1 – What is a Company? Corporate Law Regulatory Framework, Registration and its Effects What is a Company? A company is an artificial entity recognised by the law as a legal person with rights and liabilities Distinct from its shareholders, directors, officers and employees Elements of a company Limited Liability  Joint Stock Companies Act 1844  Unlimited liability of shareholders  Limited Liability Act 1855  Perpetual Succession  Existence undisturbed by change in shareholders or directors  Birth = Day of Registration  Death = Day of Deregistration  Lifespan – Between Registration and Deregistration Separate Legal Entity  s 124 Corporations Act 2001 (Cth): Legal capacity of natural person. Can: o Own property o Contract o Sue and be sued o Issue shares Issuing of shares and transferability of shares

Shareholders vs Directors/Board of Directors  

Shareholders are regarded as the “owners” of the company Directors are usually given power to control the management of the company’s business

What is the use of companies?  Usually used as a vehicle to run a business  Provides tax advantages  Advantage of limited liability to shareholders

History of Corporate Law in Australia        

Before federation, UK law operated in Australia At federation this power became a parliamentary power – not UK In the beginning, company law was regulated by each state Attempts to harmonise law were ultimately unsuccessful Cth tried to take control and legislate for all states in 1989 HC said the Cth did not have the power under s 51(xx) States referred powers to the Cth Cth were then able to enact the Corporations Act 2001 Cth Constitutional Crisis for Australia’s Corporations Laws

Section 51(xx) of the Constitution

New South Wales v Commonwealth (1989) 169 CLR 482

Artificial schemes developed to standardise and harmonise Company Laws

Corporations Act 2001 (Cth)

Regulatory Framework

Empowers the Commonwealth Parliament (i.e. not the States) to: “make laws ... with respect to ... foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth”  The past tense of the word formed meant that Cth cannot enact laws for corporations in the process of formation – only operates for companies already formed  In 1989 Commonwealth Parliament passed new legislation (Close Corporations Act (1989) (Cth)) to deal with non-public companies in a single piece of legislation - “proprietary companies” would have been called “close corporations” after the legislation.  NSW argued that the Commonwealth Parliament has no power under s 51(xx) to form new companies only laws in respect of companies already formed  Commonwealth argued ‘formed’ serves to distinguish local trading or financial corporations from foreign corporations Held:  The word ‘formed’ is used in the past tense to refer to companies that have already been incorporated.  This means the Commonwealth cannot rely on s.51(xx) to make laws about bringing new companies into existence (i.e. the process of incorporating companies)  Therefore, the Commonwealth did not have the power to take over corporate regulation in Australia.  1991 Cooperative scheme – Corporations Law o Cth amended the unconstitutional Corporations Act 1989 – called the ‘Corporations Law’ o Each State enacted legislation which adopted the Corporations Law to be its Corporations Law o Cth authorised the ASC (now ASIC) to exercise powers conferred by state legislation o Cross-vesting of jurisdiction in corporations law matters in the Fed Ct and state Supreme Courts  Re Wakim (1999) o HC held the cross vesting of jurisdiction was unconstitutional to the extent it conferred jurisdiction on the Federal Court with respect to matters under state law (i.e. the Corporations Law of each state)  R v. Hughes (2000) o HC cast doubt on the constitutionality of a scheme because it involved the states (under their respective Corporations Laws) conferring powers on Commonwealth officers  Referral of state powers to the Parliament of the Commonwealth s 51(xxxvii) of the Constitution 1900 (Imp):  In 2001 States and Territories unanimously agreed for 5 years, but the referral needs constant renewal

Australian Securities and Investments Commission (ASIC)

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Takeovers Panel

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 Australian Stock Exchange (ASX)

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Primary corporate regulator: Ensures Corporations Act is complied with ASIC Act 2001 (Cth): Commonwealth Agency (b/c referral of State power) Role and functions o Registers new companies o Regulation of financial services and markets o Powers of investigation to ensure compliance with of the Corporations Act 2001 (Cth) – ASIC Act 2001 provides wide powers to do so o Power to bring legal proceedings A peer review body with at least 5 members Important part of the machinery for the control of company takeovers (formerly, these powers were held by the Courts) Has power to declare ‘unacceptable circumstances’ Private Company Public companies that ‘list’ on the stock exchange ‘contract’ with the ASX that they will comply with the Listing Rules

The Australian Prudential Regulation Authority (APRA) Parliamentary Joint Committee on Corporations and Financial Services Australian Accounting Standards Board (AASB) Financial Reporting Council (FRC)

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Recent and Expected Reforms Insolvency Law Reform Act 2016 (Cth) Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) Professional Standards of Financial Advisers) Act 2017 (Cth) Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 o Safe harbour for directors under “insolvent trading circumstances” not protected by the business judgment rule under s 180(2) of the CA` Legislation to follow after Royal Banking Commission? Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers Act 2020 o Unfair contract terms Financial Sector Reform (Hayne Royal Commission Response – Stronger Regulators Act 2020 o An act to amend the law in relation to ASIC and financial sector regulation Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 Treasury Laws Amendment (Bushfire Tax Assistance) Act 2020

Registration and its Effects

Company comes into existence on registration (s119)  Own property Powers of a company as a  Contract body corporate are listed in s124(1) and includes  Sue and be sued legal capacity to:  Issue shares  Do anything it is lawfully authorised to do Perpetual succession The corporation continues to exist despite the death, bankruptcy, insanity, change in membership or an exit of any owner or member, or any transfer of shares. Limited Liability Liability of shareholders is limited to the amount unpaid on their shares  Limited risk and sharing of risks was/is necessary to mobilise much needed capital for large projects and entrepreneurial development of economies Separate Legal Entity  Company’s obligations and liabilities are its own, and not those of its shareholders or directors or managers and employees  Company can sue and be sued in its own name  Company has perpetual succession  Company’s property is not the property of its participants  Company can contract with its participants  A company may concurrently have a variety of legal relationships with others (e.g. directors, shareholders and employees)  Salomon v Salomon & Co Ltd [1897] AC 22 o A company is a separate legal entity even though a single person manages and controls it o A company can contract with its controlling participants  Lee v Lee’s Air Farming Ltd [1961] AC 12 o A company is a separate entity from its controller – who may also be its sole employee o A company is a separate legal entity and a person may concurrently have a variety of legal relationships with that company  Macaura v Northern Assurance Co Ltd [1925] AC 619 o Shareholders do not have a proprietary interest in a company’s property o Insurance legislation required policy holder to have an ‘insurable interest’ in the property o The company was the owner of the timber, not Macaura (meaning he did not have an ‘insurable interest’ and so could not claim on the insurance for the damaged timber) o Company’s property is not the property of its participants o The importance of not forgetting the distinction between the interest of “the separate legal entity” and the “shareholders and creditors” o However, treat this case with caution because of section 17 of the Insurance Contracts Act 1984 (Cth)!

Salomon's Principle and Corporate Groups Walker v Wimborne Mason J rejected the argument that where companies were associated in a group, directors could disregard their duties to individual companies in the group provided their actions were undertaken for the benefit of the group as a whole Regarded each company within the group as a separate legal entity. A Industrial Equity Ltd v subsidiary's profits could not be regarded as the profits of its holding Blackburn company available for payment of the holding company's dividend. Marketing agreement was an undertaking given by the subsidiary and Pioneer Concrete not the holding company: The two (subsidiary and holding company) Services v Yelnah were separate legal entities. It was impossible to infer an agency relationship between the holding and subsidiary companies in the circumstances.

Piercing the Corporate Veil Disregarding the concept of the company as a separate entity and imposing liability Only in exceptional circumstances Corporate veil  Legal rules that grant the company ‘separate legal personality’ and separate the company from its participants (e.g. shareholders, directors) are referred to as the veil of incorporation or corporate veil  Salomon’s case established that a company and its participants must be treated separately – i.e. the corporate veil protects the company’s participants from liability “… once the company is legally incorporated it must be treated like any independent person with its rights and liabilities appropriated to itself …” Common law exceptions  Where company used to avoid existing legal duty  Where company used to perpetrate a fraud (= Instances where “the corporate form was used for something the law never intended it to be used for”) Statutory exceptions  Directors’ liability for insolvent trading – s 588G  Uncommercial transactions – for purposes of insolvency  Security granted to officers  Financial assistance provided to officers  Taxation legislation – holding directors personally liable Insolvent trading  Insolvency = company cannot pay its debts as they fall due for payment  Corporations Act lifts the corporate veil when a company trades while insolvent and imposes personal liability on directors for the company’s debts (s.588G): o Directors become personally liable if they fail to prevent the company incurring a debt when there are reasonable grounds to suspect the company is insolvent or the debt will render the company insolvent  Defences – s.588H Group Companies

Legislation that lifts the corporate veil of group companies  Holding company’s liability for insolvent trading by subsidiary  Consolidated financial statements  Taxation consolidation

Piercing the corporate veil at Common Law (by a Court)

 The benefit of the group as a whole  Pooling in liquidation “…the court is not free to disregard the principle of Salomon v Salomon merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entitled with all the rights and liabilities that would normally attach to separate legal entities: Adams v Cape Industries plc Can only be justified if “the corporate form is used for something the law never intended it to be used for”. Ford, Austin and Ramsay, Principles of Corporations Law mentions only 3 instances where a court can depart from the separate entity doctrine: 1. Where a company structure is used to perpetuate a fraud 2. Where a company structure is used with the sole, or dominant, purpose of enabling another person to avoid an existing legal obligation 3. Under-resourced companies may be found to be agents of their controllers or to be shams or devices

Types of Business Structure Factors that affect business structure:  Purpose  Size  Costs  Flexibility  Liability  Risk & Liability  Tax Type of Structure Company

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 Sole Proprietor/Trader

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Individual conducts his/her own business

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Partnership Carrying on a

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Separate legal entity Limited liability Perpetual succession Flexibility o Share classes o Liquidity Finance Simple Minimal establishment costs Minimal regulatory compliance issues High level of control Minimal establishment costs: only need meet definition of partnership

Cons       

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Corporations Act compliance - complicated Establishment and ongoing costs (e.g. ASIC fees) Shareholders less involved in management Public disclosure requirements unlimited liability Small size makes raising finance difficult Limited lifespan

No separate legal entity: partners contract personally for the partnership

business in common with a view to profit (s.5 Partnership Act)

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Minimal regulatory compliance issues Active in the conduct of the business

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 Joint Venture

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Contractual relationship similar to partnership but relationship is not a business in common

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Trust

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A relationship, not a legal entity. Many types. 

Severally liable: i.e. obligations and liabilities can be individualised (unlike partnership) Inexpensive to create and maintain

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Beneficiaries have an equitable interest in trust property; contra shareholders who have no legal/equitable interest in company property Income splitting – but may be contrary to antitax avoidance

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Risk: partners incur debts/obligations on behalf of other partners i.e. joint and several liability Size limited to 20 partners (subject to exceptions No limited liability No perpetual succession

Maximum life span of 80 years (law against perpetuities) Beneficiaries have limited powers (unlike shareholders) No separate legal entity; trust cannot hold property, contract, sue or be sued Trustee personally liable

Company Registration Corporations Act 2001 (Cth) Key terminology:  S 57A(1): Subject to this section, corporation includes: o a company o any body corporate o an unincorporated body that under the law of its place of origin, may sue or be sued, or may hold property in the name of its secretary or an officer

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s 1276 Definitions: o Body corporate includes a Part 5.7 body.

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S 119: A company comes into existence as a body corporate at the beginning of the day on which it is registered. o i.e. on registration, a company becomes a separate legal person S 124(1): A company has the legal capacity and powers of an individual both in and outside this jurisdiction. It also has all the powers of a body corporate, including the power to: (a) Issue and cancel shares in the company (b) Issue debentures (c) Grant options over unissued shares in the company (d) Distribute any of the company’s property among the members, in kind or otherwise (e) Grant a security interest (f) Grant a circulating security interest over company property (g) Arrange for the company to be registered and recognised as a body corporate outside the Commonwealth jurisdiction (h) Do anything it is authorised to do by any other law (including foreign law)

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Company Name

Application for Registration

Post-registration Requirements

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Company Registration Choice of company name Check availability – s 147(1) Reserve the name (optional) Display of company name ACN or ABN ASIC Form 201 Select type of company Select name Obtain consents Select registered office Replaceable rules or company constitutions Lodge application and pay fees Certificate of registration issued ASIC Corporate Key Appointment of director and secretary Common seal (optional) Registers Appointment of auditors Financial records, and books

Topic 2 – Types of Companies and their Regulations; Internal Governance, Company Constitutions and Replaceable Rules Types of Companies: An Overview  

The types of companies available under the Corporations Act differ in how they treat (1) member liability, and (2) their public status S 112(1) Corporations Act 2001 (Cth): Classification according to the liability of members: o Limited by shares o Limited by guarantee o Unlimited liability

o No liability Types of Directors  Board of Directors o Non-executive Directors (NEDs) – not employed by companies but contracted to give advice in the best interest of the company o Independent NEDs o Executive Directors  Shareholders o Ordinary o Preference o Governor’s shares o Employee shares

Classification of Company according to the liability of members per s 112(1): Limited by Shares  S 9 Definition: A company limited by shares means a company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them  S 254A, 254M-254N: partly paid shares  Most popular company structure  S 516: Members’ liability is limited to the amount unpaid on their shares – if shares are fully paid, there is no risk  S 148(2): Company name must have one of the following at the end: o Proprietary Limited o Pty Ltd o Limited o Ltd Limited by Guarantee  S 9 Definition: A company limited by guarantee means a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up. o Shareholders can choose to partially pay their shares – but if they do, they are liable for the unpaid part  s 517: Member’s liability is limited to the amount they have undertaken to contribute if the company is wound up o i.e. they agree to be liable for a certain amount  No share capital  Often used for non-profit activities  Can only be a public company Unlimited Liability  S 9 Definition: an unlimited company means a company whose members have no limit placed on their liability o i.e. members are jointly and severally liable for the company’s debts without limitation upon winding up  Not suitable for trading ventures – primarily used by professional associations where members are required to have unlimited liability  Can be public or proprietary – must have Proprietary at end of name if they are proprietary  S 148(3): an unlimited proprietary company must have the word “Proprietary” at the end of its name

No Liability  S 112(2): A company may be registered as a no liability company ONLY if: (a) The company has a share capital (b) the company’s constitution states that its sole objects are mining purposes (c) the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them  Can only be a public company  S 148(4): “No liability” or “NL” must be used in name  ASIC v SIM Resources NL:

Classification of Company According to Public Status – Public v Proprietary Function

Number of Members

Name

Directors Secretary Constitution and replaceable rules Auditors

Proprieta...